A stock market has three main types of participants classified as retail, institutions, and proprietary. Under retail traders, the exchanges classify all such traders who trade on their own and are clients of brokers. Proprietary traders are brokers or traders who have their own exchange cards. They trade on their own money and do not have any clients.
Institutional traders are broadly classified as domestic institutional investors (DII) and foreign institutional investors (FII). In this article, let’s take a closer look at DIIs here.
DII is a broad definition of institutional investors who invest in various financial securities. They are an important part of the stock market and have more often than not played a vital role in absorbing the selling of FIIs in equity markets.
At the peak of the pandemic, selloff DIIs made record investments and were instrumental in bringing some stability to the market. Their subsequent buying resulted in a faster than expected recovery in the market.
DIIs not only participate in the secondary market, but also invest in primary markets, corporate bonds, and government securities.
There are four broad categories of domestic institutional investors:
Domestic mutual funds constitute a big part of the market. These funds are an indirect way of routing retail money in the market. They pool money from all kinds of investors, including individuals, corporate, trusts, and also other institutions.
As of December 2021, total equity Asset Under Management (AUM) by mutual fund companies touched Rs 37.92 trillion and grew steadily. Systematic investment plan (SIP) which entails a regular monthly investment, crossed over Rs 11,000 crore every month. Indian mutual funds have never had it so good.
Many mutual schemes are catering to different kinds of investors based on their risk profile and return expectations. Based on the funds received in various schemes the mutual fund managers make their investment decisions and invest in the market.
A rapidly growing entity in the Indian equity markets is the insurance companies. Many insurance companies offer a Term Policy that covers life and clubs it with an investment scheme. General Insurance companies that offer health insurance, fire insurance, marine insurance, among others are also actively investing in the market.
Investment of insurance companies in the Indian market has been growing steadily in line with the growth of these companies. Insurance companies are allowed to invest only in a select list of stocks, unlike a mutual fund that has a much larger playing field.
Public sector companies and various government establishments offer a pension scheme to their employees. A part of their salary is deducted under the head Pension Fund, also known as a Retirement fund. The employee is given the option of investing their money in debt or equity.
Earlier, most employees used to select debt as the investment option, but ever since interest rates have fallen, their choice has moved towards equity, as a result, a large chunk of pension money is now being channeled to the market. Since pension is deducted every month from the salary of the employee till his working life, Pension funds are considered to be a strong source of funds. Some of the biggest funds in the world are pension funds.
In India, there are various government pension fund schemes like National Pension Scheme, Provident Public Fund, and Employees’ Provident Fund Organisation. Collectively, their investment is classified as Pension Funds under Domestic Institutional Investors (DII).
The treasury division of banks and other financial institutions also invests in the market either directly or through mutual funds. Though their investment is small and sporadic, their activity is steadily increasing in the market.
There is a broad classification of participants in the market. All broker clients, including retail and high net worth players, are clubbed under retail. Apart from retail, the other participants that are clubbed include institutions and proprietary. Under institutions, we have both the foreign and domestic, and within domestic, there are players like mutual funds, insurance, pension funds, banks, and financial institutions. There is a segment called proprietary traders who are brokers or traders who have their own exchange cards. They trade on their own money and do not have any clients.
Foreign institutional investors or Foreign Portfolio Investment (FPI) are investors who are foreigners. These may include private as well as institutional investors. We presently do not have easy access to the breakup of foreign inflows. However, we get a break up of data of foreign funds in the cash and derivative market.
DII is a broad definition of institutional investors who invest in various financial securities. They are an important part of the stock market and have more often than not played a vital role in absorbing the selling of FIIs in equity markets. DIIs not only participate in the secondary market, but also invest in primary markets, corporate bonds, and government securities.
There are four main classifications of DII–mutual funds, insurance, pension funds, and banks and financial institutions are clubbed together.
Mutual funds collect money from the public and invest them in the market, while insurance companies deploy their excess float in the market. Pension funds invest the pension component of an individual’s salary while banks and financial institutions are the smallest among the DII players investing their surplus
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